Friday, January 6, 2012

Is The NCAA an Illegal Cartel?

Greedy Cartelist?

An Op-Ed in Sunday's New York Times entitled "The College Sports Cartel," Joe Nocera decries the fact that NCAA student athletes cannot receive more than a full scholarship, room and board, and stipend to cover living expenses. As the author notes, NCAA rules --- the product of an agreement between competing member schools --- forbid schools to pay student-athletes a salary analogous to what, say, a minor league baseball team would pay its players. (Put another way, NCAA rules require student-athletes to remain amateurs.) The author characterizes this agreement as "collusion" of the sort ordinarily forbidden by the antitrust laws, collusion that enriches member schools at the expense of purportedly "shackled" student athletes. He ends by opining that "[I]t certainly would be worthwhile to see someone challenge [the NCAA's] cartel behavior in court."

And yet, as Nocera himself perceptively admits: "Sports leagues can’t exist without at least some [so-called] collusion." A classic example, of course, the agreement between a league's members on the number of games in a season. Thus, the NBA's decision that each team will play "only" 82 games in the regular season is a horizontal agreement on the output of games, a limitation that could be unlawful in other circumstances. Ditto for members' agreement on the length of the playoffs, including how many games are in the finals. (Imagine if Ford, GM and Chrysler announced they were agreeing on the number of pickup trucks they would produce in the coming year.) Indeed, calling such agreements between members of the NBA "collusion" would deprive the word of any useful descriptive value in this context, as the term would become a synonym of "contract" or "cooperation."

Sports leagues are not unique in this sense. All sorts of welfare-increasing economic activity is the result of agreements between rivals, agreements that economists and antitrust courts call "horizontal." For instance, the formation of a partnership is a horizontal agreement that eliminates rivalry between the new partners. Such partnerships often include explicit agreements between the partners not to "moonlight" and thus compete with the partnership. Ditto for franchising, which many economists properly conceptualize as an agreement between actual or potential rivals (think of the numerous independent McDonalds franchisees in a medium-sized town). Such agreements set product standards, decide what products members of the chain will offer, what ingredients each product will contain, etc. Without such (horizontal) agreements, what consumers currently experience as a well-run franchise system would rapidly devolve into a loose confederation of business establishments that, while operating under the same trademark, would offer varying products and varying degrees of quality, sowing confusion in the mind of consumers and defeating the purpose of operating under a single trademark. Thus, while such agreements reduce rivalry in some sense between members of a franchise system, they can ultimately enhance the quality of the products offered by a particular franchise system and thus further useful competition with other such systems, to the ultimate benefit of consumers and the rest of society.

In short, like many productive ventures, the NCAA and other sports leagues entail cooperation between rivals, cooperation that could be problematic in other contexts when viewed in isolation. The key question from the perspective of the antitrust laws is whether the cooperation in question, while nominally reducing competition between rivals, might in fact overcome a market failure and thus increase the welfare of society by inducing a more efficient allocation of resources. That, in short, is the focus of antitrust's "Rule of Reason, " announced in Standard Oil v. United States. (See this article for a more in depth explanation of the connection between market failure and Rule of Reason analysis.)

While litigation against the NCAA on this question might enrich antitrust lawyers, the Supreme Court has already explained how it would rule in such a case. Twenty-five years ago, in NCAA v. Bd. of Regents of the University of Oklahoma, the Court evaluated NCAA rules limiting the number of games that networks could broadcast on television during any given season. The rules also limited the number of times that any particular school could appear on television. The Court condemned the rules under the Rule of Reason because they reduced output without any offsetting benefits.

In so doing, however, the Court expressly approved other horizontal restraints imposed by the NCAA, including those fostering amateurism by the players. The Court's language (previously discussed on this blog) is worth quoting in full:

"What the NCAA and its member institutions market in this case is competition itself -- contests between competing institutions. . . . . [T]he NCAA seeks to market a particular brand of football -- college football. The identification of this 'product' with an academic tradition differentiates college football from and makes it more popular than professional sports to which it might otherwise be comparable, such as, for example, minor league baseball. In order to preserve the character and quality of the "product," athletes must not be paid, must be required to attend class, and the like. And the integrity of the 'product' cannot be preserved except by mutual agreement; if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the playing field might soon be destroyed. Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as a result enables a product to be marketed which might otherwise be unavailable. In performing this role, its actions widen consumer choice -- not only the choices available to sports fans but also those available to athletes -- and hence can be viewed as procompetitive."

The Court then noted (as suggested above) that "a restraint in a limited aspect of a market may actually enhance market-wide competition."

Simply put, the Court concluded that unbridled competition between member schools for players, thereby allowing schools to pay players a salary, would result in a market failure. That is to say, no individual school would, when setting players' compensation, take into account the impact of that decision on the overall "brand" or "image" of the product being offered. While players might benefit in the short run, the "brand appeal" of college football would suffer over the longer run, as what was once amateur athletics associated with an academic tradition (and thus a natural fan base) would degenerate into a professional league inferior to the NFL and without a natural fan base.

The result may seem to countenance an unfair distribution of the benefits produced by NCAA football. Certainly some schools earn millions each year due to the performance of their student athletes. (At the same time, however, many others lose money on the sport, and no one is proposing that student athletes share in these loses.) However, antitrust law does not exist to ensure a fair division of the gains from economic activity but instead only bans those agreements or unilateral practices that reduce economic welfare.

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Bishop James Madison

Portrait of Bishop James Madison

Who Was Bishop Madison ?

Bishop James Madison, the cousin of our nation's fourth President, was the President of the College of William and Mary from 1777 until his death in 1812. Prior to appointment as President, Madison served as a professor of natural philosophy and mathematics. During the Revolutionary War, Madison organized a militia company of students. William and Mary claims that Madison was the first professor of Political Economy in the United States. His lectures on the subject relied upon Adam Smith's Wealth of Nations, published in 1776. Along with Thomas Jefferson, Madison was instrumental in founding the School of Law at William and Mary, appointing George Wythe as William and Mary's first Professor of Law and Police.